Taxman wrongly punishing people for dipping into their pension pots
AS MANY as 200,000 savers are thought to have paid too much tax while using the pension freedoms made available to savers over age 55, The Daily Telegraph can reveal.
In many cases, savers will be unaware of overpaying and HMRC will not tell them, acting only when a claim is made.
Experts are calling for an urgent overhaul of tax procedures in light of the pension rules, which came into force in 2015.
The overpayments arise because one-off withdrawals are treated as if they were the first of regular, monthly pension payments. HMRC’S systems generate a tax code – termed “Month 1” – and then apply deductions to the withdrawal as if it is the first of many.
But according to data obtained from a Freedom of Information request, 242,000 people made just one withdrawal from their pension during the 2016-17 tax year. The flexibility of oneoff withdrawals is one of the most popular features of the new rules.
If savers realise they have been overtaxed, they must fill out one of three P55 forms to reclaim the money – something which, according to the Government’s own data, only 42,700 people have done. Britain’s largest pension companies suggest that 200,000 people may have overpaid – more if the 2015-16 tax year was included. The companies
point out that HMRC actually requires them to apply the “Month 1” code as a default.
Pension firm AJ Bell calculated that a single £10,000 pension withdrawal, which should be tax-free if no other income is taken, would be taxed by £3,099.46 if the “Month 1” code were wrongly applied.
Tom Selby, of AJ Bell, said: “Thousands of people who think they are using the new regime sensibly will have been hit with shock bills, and this will continue unless HMRC rethinks its draconian application of ‘Month 1’ tax.”
A spokesman for HMRC said: “Claimants presenting their P45 to their pension provider will pay the correct tax. In the event that they don’t, any discrepancy will be settled within 30 days of HMRC being notified.”